Cashflow Quadrant

Book Summary

Cashflow quadrant is the sequel to the Rich Dad, Poor Dad book by Robert Kiyosaki. In the previous book, author argues why one should be focusing on investing, while in this book, the author explores the question of whether investing is for all and what should one go through to become a successful investor.

In this book, the author proposes that every earning person belongs to one of the four quadrants. They are either
1) an employed person
2) self-employed person running his own business
3) business person
4) an investor

In the opinion of the author, each person is conditioned to be in one of the quadrant by his immediate surrounding. A child of an employed parent would eventually end up being an employee while a doctor who has a friend circle of other doctor’s operating their own clinics would eventually end up opening his own private clinic. However, the activities done by each person in a quadrant is quite simple and straightforward, seldom is a person able to move from one quadrant to another. Just because someone is a proficient businessman does’t necessarily mean that he will be equally good at investing. The reason is that each quadrant is not merely defined by their activities, but more so by their mindset.

(Personally, I felt most of the views the author expressed for each quadrant to be quite stereotypical. Maybe, he needed to be so to drive home his message)

The first quadrant, in which most of the world population falls currently, is the employed quadrant. The author has found that the people in employed quadrant are people who genuinely seek security over freedom. They understand that the risk of the enterprise they are working for is not on them, but on the management of the enterprise. Hence, in a way they are risk averse. Financial planning and accounting are not necessary in this quadrant, as an assured pre-determined salary would credit to their account every month.

The second quadrant belongs to the self-employed people. This quadrant is dominated by highly skilled professionals. It can be CA or doctors or highly experienced engineers doing consulting. They understand that they too skilled to working for someone else and also want to cash in the on the fact that their services are valuable. They do enjoy a lot of protection and privilege from the government as they come under small and medium enterprises. However, this sector almost always fail in scaling up. It is because they are sole hero of their business model. They might have other employees but they would be limited to assistant roles. Hence, the biggest gap in their business model is that the owner gets no passive income from the business. Earnings are dependent on the work hours of the skilled professional.

The employed and self-employed form the left side of the quadrant where there is no passive income built or a property that can be inherited by their children. This is the main difference when we go onto the right side of the quadrant.

The third quadrant are business people. From my point of view, this is the hardest quadrant with highest risks, but also enjoys the highest growth potential. There is a reason why almost always the most richest person in the world is an owner of a business and not that of a investing firm. Businesses create economical value in a society that are then capitalized by people in every quadrant. The trick to their success is not that they just have a product or an idea that recolonizes the world, but it is that they have a system through which this idea or product can reach the masses. The system ensures that the company is functioning even without the active involvement of the owner, leaving the owner enough time to plan for further expansion.

Finally, we have the investors. The single quadrant that earns all their income through passive income. For a business person, it takes a lot of resources to upgrade themselves as technology progresses. For example, take a look at the automobile sector. Tesla is currently leading the EV sector while other automobile tycoons that have been in the market for decades are lagging behind. However, for an investor, it is just a matter of hours before he sells off his old shares and buys in from the upcoming company.

The author urges that for an individual to move from one quadrant to another, they need to change their mentality, through education and guidance. Reading books and biographies is a great way to do so, however, the best way is to find some mentors. The author also says that it is important to surround yourself with skilled self-employeed people to get their expert opinion such as CAs and lawyers.